[Homestead] Real Estate 101, was Re: Housing bubble or froth
genegerue at ruralize.com
Wed Nov 8 12:41:40 EST 2006
>Home finance rates have been somewhat independent of the Fed over night rate.
In my effort to keep it short, I over-simplified. In fact, the Fed
rate is less connected to mortgage rates than bond prices because
real estate loans are in competition with bonds for investor money.
But the Fed rate drives many business decisions and does affect the
housing industry. Wall Street and consumer psychology are always
factors. Both are buoyed by good news from the Fed.
Lenders are free to set their own rates but must make them
sufficiently high to sell the paper on the secondary market so they
can make more loans. Rate setting is a balance between loan demand
and money supply. Lenders will be willing to shave their profit
margin to keep making loans. One tactic increase profit is to lower
rates but raise fees.
Seldom understood by home buyers is that primary lenders do not get
the interest. They make their profits by making and servicing loans
or selling the servicing rights.
Before looking at houses, buyers are well advised to find a good
lender first and determine all factors of their loan and knowing in
advance how much loan they qualify for and what it will cost them.
Finding the ideal home before finding the ideal loan is foolish. When
a loan negative pops up at closing time it is usually accepted
because emotions are high, in their minds the buyers have already
placed their furniture. So very few buyers stop the deal.
One big negative is a prepayment penalty. I have rarely accepted and
I almost always advised my clients to not accept a prepayment
penalty. There are valid time exception but in general a prepayment
penalty makes refinancing much more expensive and unless a buyer is
certain of their income and certain that they will stay in the home
beyond the prepay period, they are vulnerable. There is damned little
certainty of either today.
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